Guy Hands had no shortage of ideas for EMI. Not all of them made sense though. Shortly after his Terra Firma private equity firm bought the British music major in 2007, he was eager to clean up the reputation of the operation. Hands suggested that EMI introduce employee drug testing of the kind familiar to investment banks.

It was a suggestion that provoked instant alarm, given the nature of the notoriously high living music industry. "We had to talk him out of it, because we told him there would be the risk that there would be nobody left after a few weeks," said one insider. Hands – an outsider coming at the music business armed with a large CD collection and £2.5bn of debt – had once again miscalculated the nature of the company he was running.

Overambitious acquisition

On this occasion, the private equity mogul listened, and dropped the idea. But Hands's instincts at EMI – the historic home of the Beatles, Pink Floyd and Queen – often failed to serve him and the business well. Three-and-a-half years later, after an overambitious acquisition that left the company unable to handle £3bn of debt Hands had taken on, the barbarian at the gates was forced out by his bankers Citigroup, and 114 years of British ownership of the world's number four music business came to an abrupt end on a weekday afternoon.

Citigroup may be chaired by Dick Parsons, the former Time Warner chief executive who nearly pulled off a merger between Warner Music and EMI a little over a decade ago, but those who know the bank and the company say that Citi is rapidly preparing the business for a sale. The bank ruthlessly forced EMI into administration by declaring it "balance sheet insolvent" a technical manoeuvre that Hands and his Terra Firma never saw coming, largely because it was worried that it might be left with "sloppy seconds" after rival Warner Music initiated its own sale process in January.

Now that Citigroup has written off £2.2bn of loans, EMI, with a managable £1.2bn debt load, is likely to be sold within months. Out of politeness, Citigroup sources prefer to say predictably that the process is "not a fire sale" and that it is possible – if unlikely – that it will be theirs in a year's time. The rhetoric is only there to protect the bank in case something goes awry again with a company that counts Katy Perry, Swedish House Mafia and Tinie Tempah among its latter day artists.

In an effort to talk tough, Roger Faxon, the company's veteran chief executive, told journalists that EMI was not a sitting duck. "That's not a business that gets swallowed up. It is a business that swallows up, but we are on a different path and we have the financial platform to do it now." But as one rival acidly remarked "Faxon is just an employee", and he has limited control of a business that Citi is prepared to sell for as little as £400m to £600m, plus the remaining debt. With EMI's balance sheet repaired, there are buyers circling.

A quick decision remains essential for the music – any uncertainty is crippling. EMI is likely to find it near impossible to sign any acts while it is unclear what the future of the company is, and will have to work hard to keep its remaining superstars happy, the likes of Coldplay and Damon Albarn and his Gorillaz (pictured below).

Robbie Williams is out of contract and while his manager Tim Clark said this week that EMI was still in the race when it comes to any new deal with the star, he was also quick to warn it would be "ridiculous" to break up the business. Universal Music remains the runaway market leader in the UK and the US, challenged mainly by Sony - but with Warner Music, traditionally weak in the UK, showing signs of a revival with the likes of Cee Lo Green and Bruno Mars, EMI is already under pressure on home turf.

Terra Firma's ownership of EMI did see operating profits rise from £175m in 2008 to £334m in the year to March 2010, but the push for profitabilty solved few other long standing problems. Hands's team concede that EMI's recorded music business is "probably subscale" and its worldwide market share in recorded music only rose from 9.9% in 2007 to 10.0% in 2009, the last year for which figures are available from Music & Copyright. Warner, its nearest rival, is at 15.3%.

Under Hands, executives came and went at dizzying speeds. EMI slashed costs, not just on "fruit and flowers", and brought in expensive management talent. EMI's recorded music business was led first by Elio Leoni-Sceti, who came from the branded detergent group Reckitt Benckiser – an Italian who "just had no interest in music" according to one former colleague. He departed after less than two years. Hands then picked Charles Allen, the former ITV chief executive, who was quickly deemed to have failed to get to grips with the business. Meanwhile, EMI's chronically weak position in the US never improved, while its all important A&R team – the artists and repertoire executives who deal direct with musicians – also constantly shifted to the point where there were almost no established names left.

It is not now clear if EMI can ever recover creatively, and the company may well be broken up, despite the protestations of Faxon, who told staff in an email that "the press will inevitably write that EMI will be broken up and sold in pieces", before adding: "I have no doubt that the best possible way to yield the highest value for EMI is to keep our businesses together in pursuit of our strategy."

But the one advantage is that without Hands and the debt, the company or its parts are at least moderately attractive to a new owner regardless of the challenges faced by the music business.

Venture capital

The most interested potential buyer is a joint venture between Bertelsmann, the private German media group that used to own BMG before its sale to Sony Music, and another venture capital group KKR. The pairing have already approached Warner Music about buying the US group, but it is also carrying $2bn of debt, which means that they could turn their attention to EMI. Other potential suitors for EMI or Warner are principally private equity groups or wealthy individuals, while the interest of media groups such as Disney, the owner of Hollywood Records, the home to Miley Cyrus, remains muted or hard to establish.

BMG Rights Management, the Bertelsmann-KKR vehicle, is most keen on buying low-risk music assets. It wants to focus on music publishing, representing song writers, and where profits are more durable because old established hits have a firm value. EMI's own music publishing division is the world's second largest, home to songs from New York, New York to Lady Marmalade, has a share of 19.3%, and generated 45% of the company's operating profits last year. But BMG is also understood to be showing an interest in buying into recorded music, partly because the longevity of acts such as Pink Floyd have similarly reliable earning qualities, although its interest in the high risk business of discovering new artists is low.

That leaves the old, obvious solution – a merger with Warner Music – the deal that has dogged both companies for over a decade. While Faxon has questioned whether Warner has the capital available to do a deal, Warner Music is said to be confident that its three venture capital backers could fund a bid for EMI if they were so willing. Together the companies would still be behind Universal, but ahead of Sony, in recorded music, while one of their publishing catalogues would have to be sold for regulatory reasons. American control may be hard to swallow, but in an industry under such pressure, it would probably the only way of maintaining some of EMI's recorded music heritage.

Sign up for the Guardian Today

Our editors' picks for the day's top news and commentary delivered to your inbox each morning.